Is Flood Re’s future already in doubt?

The record levels of rainfall this winter have brought the misery of flooding to thousands of households and businesses in the north of England and Scotland in particular. Insured losses are estimated to amount to almost £1.5bn. The Environment Agency has been taken to task by MPs and, despite pledges by government to spend more on defences, questions are being asked about our approach to managing floods. No surprise given that we have had the five wettest years since 2000.

According to the Association of British Insurers, annual flood and storm damage costs are approximately £1.1bn while the Association of Drainage Authorities believes that through a reduction in capacity to manage water levels as a result of cutbacks in funding, those households at significant risk of flood damage could increase from 330,000 today to 570,000 in 2035. It estimates that a 10-60% increase in extreme rainfall could lead to a quadrupling of flooding in urban areas.

The prospect of having to cope with floods more frequently as weather patterns change and intense rainfall becomes more frequent means that it is highly likely that an increasing number of properties could be deemed to be at significant risk of flooding. So what does this all mean for the fledgling Flood Re scheme – the agreement between the insurance industry and the Government to help the flood insurance element of home insurance to remain available and affordable to homeowners at risk of flooding?

At the time of writing, while the regulations approving the scheme were signed off by the flooding minister last year, the scheme hadn’t secured its targeted level of reinsurance protection to reach the planned annual liability limit of £2.1bn. This process is targeted to finish this month to ensure that Flood Re will remain on track to accept its first policies in April.

However, given the anticipated level of losses from the latest floods and predictions for the future, concerns are already being aired that the scheme’s proposed levels of funds and reinsurance cover will be inadequate. If this were the case, it would mean insurers would be required to make up the difference – and this would undoubtedly lead to a rise in premiums across the board and the prospect of vastly inflated prices and excesses for some. In which case, what would be the point of Flood Re at all?

The jury is out both on the issue of when Flood Re will actually launch and whether it will have the capability to cope with current and future levels of flood and storm damage given ongoing climate change. There is also the question as to whether it should be asked to cope if government does not review the country’s approach to managing water levels.